PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The co

Question

PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was:

Direct material $625,000

Direct labor 375,000

Variable overhead 125,000

Fixed overhead 1,500,000

Total cost $2,625,000

At the start of the current year, the company received an order for 3,400 drives from a computer company in China. Management of PowerDrive has mixed feelings about the order. On the one hand they welcome the order because they currently have excess capacity. Also, this is the company’s first international order. On the other hand, the company in China is willing to pay only $130 per unit. What will be the effect on profit of accepting the order?

Explanation / Answer

PowerDrive Inc. Incremental Profit Analysis For 25000 units Special order 3400 units Details   Per Unit Total Per Unit Total Sales Revenue            175         4,375,000                 130                  442,000 Variable costs Direct Materials        25.00            625,000                   25                    85,000 Direct Labor        15.00            375,000                   15                    51,000 Variable OH           5.00            125,000                     5                    17,000 Total Variable cost          45.00         1,125,000                   45                  153,000 Contribution Margin            130         3,250,000                   85                  289,000 Fixed cost         1,500,000                              -   Net Operating Income         1,750,000                  289,000 As there is sufficient capacity , assuming no extra fixed cost for the China Order, So Net Increase in Operating profit will be $ 289,000

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